Compliance

Doral Financial Corp., a mortgage lender based in San Juan, Puerto Rico, has announced the selection of Bear Stearns and JPMorgan to assist the company in evaluating options for refinancing its $625 million floating-rate senior notes that mature in July 2007.In September, Doral announced an agreement with the Securities and Exchange Commission under which it will pay a $25 million civil penalty in connection with the SEC's probe of Doral's restatement of financial results for 2000-2004. Doral's restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. Doral can be found online at http://www.doralfinancial.com.

The Federal Deposit Insurance Corp. has concluded that two banks engaged in discriminatory mortgage lending practices, and the agency has referred their cases to the Department of Justice for further action.In the fall of 2005, the FDIC targeted special examinations of 47 banks whose Home Mortgage Disclosure Act showed the largest loan pricing disparities. The agency has completed 33 of the HMDA "outliers" examinations, and two other institutions face possible referrals to the DOJ, according to an FDIC official. A DOJ official recently said the Civil Rights Division has received HMDA-related referrals from federal banking regulators. But he declined to say how many, or what agencies made the referrals. Skadden Arps attorney Andrew Sandler told a Consumer Bankers Association fair-lending conference that all federal banking regulators have ongoing HMDA-related investigations, but that the FDIC has been the most aggressive.

Three "housing hot spots" in Ohio are among the five U.S. markets deemed most at risk for increased levels of mortgage fraud over the next 18 months, according to CoreLogic, a Sacramento, Calif.-based provider of fraud prevention technology and services to the mortgage industry.The five major metropolitan statistical areas most at risk, according to the Core Mortgage Risk Monitor, are Akron, Ohio; Dayton, Ohio; Detroit-Livonia-Dearborn, Mich.; Memphis, Tenn.-Miss.-Ark.; and Cleveland-Elyria-Mentor, Ohio. Although mortgage risk levels "remain relatively high," CoreLogic's chief economist, Mark Fleming, said the company is "seeing a stabilizing housing market characterized by decreasing house price appreciation and a slower increase in the risk index." The index measures collateral risk, which is risk related to the accuracy of a residential property valuation and "the sustainability of that valuation over the life of the mortgage due to the unique characteristics of the property, market, and mortgage contract participants," CoreLogic said. The company can be found on the Web at http://www.corelogic.com.

Federal banking regulators are discussing ways to supplement their nontraditional mortgage guidance so that the underwriting standards apply to 2/28 adjustable-rate mortgages, which also carry the risk of payment shock after the initial two-year rate expires.Sheila Bair, chairman of the Federal Deposit Insurance Corp., said 2/28 ARMs are "technically" not covered by the guidance issued in September by federal regulators. "We have been thinking in terms of maybe doing some kind of an advisory to complement the guidance," she told a Women in Housing and Finance luncheon in Washington. The Center for Responsible Lending, Durham, N.C., calls 2/28s "exploding ARMs." The consumer group has urged the regulators to act because 2/28s are generally underwritten based on teaser rates, and many borrowers cannot afford the fully indexed rate. Similar issues with interest-only and payment-option ARMs prompted the regulators to issue the nontraditional mortgage guidance. "We are very concerned about the increased reliance in the subprime market on loans that have a built-in payment shock," said CRL vice president Josh Nassar.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators are issuing nontraditional mortgage guidance for state-licensed mortgage bankers and brokers that is consistent with federal guidelines on originating interest-only and payment-option ARMs."At this stage of the game, it is very important to provide consistent guidance to all providers in the industry," said CSBS vice president Michael Stevens. Individual state regulators are planning to issue the guidance as best practices or regulatory bulletins to get it out quickly. Later the guidance will be translated into regulations or statutes, depending on the state. The state regulators pledged to work with their federal colleagues on improving the guidance if additional consumer protections are needed down the road. "We will do that together in cooperation with federal regulators," Mr. Stevens told reporters. Federal regulators issued guidance on nontraditional mortgages that applies to all federally insured banks and thrifts on Sept. 29.

The National Association of Mortgage Brokers is calling on federal banking regulators to delay implementation of their underwriting guidance on nontraditional mortgage products until state regulators are ready to implement similar guidance.NAMB president Harry Dinham said the guidance will be "ineffective" unless it applies to all mortgage originators. "Uneven or uncoordinated implementation of the federal guidance will simply create consumer confusion and marketplace inefficiencies," according to a resolution adopted by the NAMB's board of directors. State regulators are working on nontraditional mortgage guidance for state-licensed mortgage bankers and brokers that is similar to federal guidance on interest-only and payment-option adjustable-rate mortgages. The state guidance is expected to be issued very soon. Under the federal guidance, banks and thrifts are required to monitor broker originations and take corrective action if a broker does not follow the federal guidance.

Federal banking regulators are seeking more information about nontraditional mortgage products, and all banks will be required to report their holdings of one- to four-family loans with negative amortization features starting with the first-quarter 2007 call report.The regulators are also proposing additional reporting requirement for banks with large exposures. They might have to report the total maximum remaining amount of negative amortization contractually permitted on interest-only and payment-option ARMs and the total amount of negative amortization that is included in the carrying amount of these loans. The additional reporting requirements would be phased in, and the regulators are seeking comments on the appropriate reporting thresholds. "The banking agencies request comment on the specific dollar amount and percentage of loans that should be used in setting the size threshold," says the joint notice and request for comments.

Democrats have won control of the House, which will allow Rep. Barney Frank, D-Mass., to chair the Financial Services Committee and press for new housing production programs and predatory-lending legislation.In the Senate, the Democrats may have won a one-seat majority, depending on the outcome of a probable recount in Virginia. Despite the uncertainty, Senate Democrats will probably act as if they have won control when Congress returns for a lame-duck session next week to complete unfinished business, such as appropriation bills and regulatory reform for the housing government-sponsored enterprises. Floyd Stoner, the top lobbyist of the American Bankers Association, said it is difficult to tell what the lawmakers will do after the "shock" of the election results wear off. However, GSE reform is an issue where both the House and the Senate have acted, and it is "pretty clear where a resolution would be," he said. "But even with all that, getting anything done will be difficult." The election results boosted Fannie Mae's and Freddie Mac's stock prices as investors realized that the Republicans have lost their chance to scale back the GSEs' mortgage portfolios.

Class-action lawyers are ready to pounce on payment-option adjustable-rate mortgage lenders once resets and delinquencies start to pile up in the second quarter of next year, according to an industry litigation attorney."This is going to be an absolute nightmare for the industry," attorney Andrew Sandler told a Consumer Bankers Association fair-lending conference. The partner at Skadden Arps reported that the class-action bar is counting on property value declines and rate resets that will triple monthly payments for homeowners who have relied on the minimum-payment option. The class-action attorneys will contend that lenders did not properly warn homebuyers about the risks associated with negative amortization and the potential for payment shock, Mr. Sandler said. And they will point to recent underwriting guidance issued by federal banking regulators to show that lenders placed their clients in unsuitable loans.

Fidelity National Information Services Inc., Jacksonville, Fla., has announced the acquisition of Watterson Prime LLC, a Bellevue, Wash.-based provider of due diligence services to financial institutions that invest in and securitize mortgage loans.The terms of the transaction were not disclosed. Fidelity said the due diligence services will be integrated with service offerings such as the FIS Hansen Quality HQ Score, a collateral risk score designed to protect clients against property valuation fraud and overvaluation risk. "This acquisition expands our product breadth and our ability to assess risk and certify the quality of mortgage portfolios," said Eric Swenson, president of the FIS Mortgage Information Services Division. "It also enables us to develop innovative products and provides us with a competitive advantage in the marketplace." The companies can be found online at http://www.fidelityinfoservices.com and http://www.wprime.com.

The California Association of Mortgage Brokers is promoting what it terms "a comprehensive solution to curbing abusive lending practices."The trade group has issued a "best-practices guide" and conducted a conference call on the subject. "Mortgage brokers are the bridge for consumers in the loan process because they provide loan options that meet the exact needs of the borrower," said CAMB president Jack Williams. "Like a fine tailor, quality mortgage brokers go the extra mile to find a loan that fits the borrower's financial needs or objectives." The guide calls for: uniform licensing standards with mandatory pre-education, continuing education, and criminal background checks for all loan originators; updated information booklets and key disclosures to address nontraditional mortgages; the enforcement of existing abusive lending laws; workplace efforts on integrity and consumer education; and expanded financial literacy programs. Michael Faust, the CAMB's government affairs chairman, said the guide grew out of the recent dialogue over nontraditional products and abusive lending practices. But that dialogue, he said, "has broken down, with everyone taking their sides and screaming their interest points as loud as they can," affecting the ability to reach a compromise.

Countrywide Home Loans chief Angelo Mozilo on Wednesday defended payment-option adjustable-rate mortgages, saying the product is performing well but that he fears new regulatory guidance on the loans will create an "unlevel" playing field that favors lenders owned by Wall Street.Speaking before the National Association of Home Builders, Mr. Mozilo said regulatory guidance that requires lenders to consider potential negative amortization when qualifying option ARM borrowers, favors unregulated mortgage bankers owned by investment bankers such as Bear Stearns and Lehman Brothers. "It has created a terribly unlevel playing field," Mr. Mozilo said, adding that unregulated institutions are not putting the product on the balance sheets of their depositories, which are regulated. (For the full story, see the Oct. 30 issue of National Mortgage News.)

Street Resource Group Inc., an Atlanta-based provider of technology and software for mortgage warehouse lending, has announced that its clients will now have access to DataVerify Corp.'s data integrity verification and fraud prevention platform product.The product -- DRIVE, for data risk integrity verification engine -- provides automated tools designed to replace manual verifications of such information as employment and income while "dramatically" reducing loan default costs, DataVerify said. "In an environment in which most lenders are tightening their budgets while suffering significant increases in fraud-related losses, we strongly believe that the combination of our online credit and collateral fraud-prevention solutions and SRG's online automated mortgage warehouse solution adds value to both our clients' bottom lines by both streamlining their internal processes and increasing the quality of their loans," said Steve Halper, founder and chief executive officer of DataVerify. The companies can be found online at http://www.streetresource.com and http://www.dataverify.com.

Fannie Mae and Freddie Mac must create and maintain a record retention program that provides examiners with ready access to complete and accurate records, according to a final rule approved by the Office of Federal Housing Enterprise Oversight."With this regulation, the enterprises will have an obligation to maintain and promptly produce records needed for regulatory examinations and other proceedings -- an essential element of safe and sound operations," OFHEO Director James Lockhart said. OFHEO is giving the two government-sponsored enterprises 120 days to implement their record retention programs before taking enforcement actions for noncompliance. The regulator acknowledged that the GSEs are in the process of developing and upgrading their record management systems. 'To that end, both during the 120-day implementation period and afterwards, OFHEO encourages each enterprise to submit relevant materials to and confer with its examiner-in-charge as needed to ensure that its record retention program is compliant," the final rule says.

Agoura Hills, Calif.-based Interthinx, a provider of fraud prevention, compliance, and decision support tools, has launched an online testing mechanism in conjunction with its fraud detection training film, FSI: Fraud Scheme Investigation.The FSI video is a mortgage fraud detection training tool produced by Interthinx. The film parodies CSI: Crime Scene Investigation, the popular prime-time television series, to demonstrate the characteristics and "red flags" of a complicated property-flipping scheme, the company said. FSI was inspired by actual events and is free to the mortgage industry. The free online FSI Exam Program will provide a means to measure learning achieved by watching the FSI film. The announcement of the online testing mechanism was made at the Mortgage Bankers Association's 93rd Annual Convention. The company can be found on the Web at http://www.interthinx.com.

CoreLogic, a Sacramento, Calif.-based provider of mortgage risk assessment and fraud prevention systems, has released findings from its broker management database indicating that 7% of brokers account for 63% of early payment defaults, with the riskiest 0.5% of brokers accounting for 70% of all losses.CoreLogic said its broker database tracks more than 38 million loans and 190,000 brokers and is the engine powering ThirdParty Scorecard, a Web-based software tool that helps residential mortgage lenders evaluate and manage the risk associated with their broker network. The most recent statistics illustrate the key role brokers play in the risk management chain and why broker monitoring and management tools are critical to the financial prospects of wholesale originators, the company said. Core Logic made the announcement at the Mortgage Bankers Association's 93rd Annual Conference & Expo in Chicago. The company can be found on the Web at http://www.corelogic.com.

Doral Financial Corp., the troubled mortgage lender based in San Juan, Puerto Rico, has reported a net loss of $33.8 million ($0.47 per share) for the first six months of 2006.Noting that it has filed its Form 10-Q for the period with the Securities and Exchange Commission, Doral said the loss reflects "significant" restatement- and re-engineering-related expenses; an $8.2 million charge related to the restructuring of certain prior transfers of mortgage loans to local financial institutions; and a $12.3 million charge related to the transfer of some mortgage loans held for sale to its loan receivables portfolio. In September, Doral announced an agreement with the SEC under which the mortgage lender will pay a $25 million civil penalty in connection with the SEC's probe of Doral's restatement of financial results for 2000-2004. Doral said it had agreed, without admitting or denying any wrongdoing, to be enjoined from future violations of certain provisions of the securities laws. Doral's restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. In March, the company signed consent orders with banking regulators that restrict its payment of dividends and require it to review its mortgage portfolio and submit plans on maintaining capital adequacy and liquidity. Doral can be found online at http://www.doralfinancial.com.

Mortgage Builder Software Inc., Southfield, Mich., has announced an interface with ComplianceEase that it says will enable its customers to determine whether their loans comply with federal, state, and local regulations.ComplianceEase's flagship product, ComplianceAnalyzer, reviews loans for a variety of multijurisdictional compliance regulations. "Mortgage Builder provides the required data, allowing ComplianceEase to perform the testing procedures ensuring the loan is compliant, and then ComplianceEase returns the results via HTML, where they can be viewed and stored for future reference," said Keven Smith, president of Mortgage Builder. The announcement was made at the Mortgage Bankers Association annual convention in Chicago. The companies can be found online at http://www.mortgagebuilder.com and http://www.complianceease.com.

Fannie Mae and Freddie Mac intend to win back some of the market share they have ceded to private-label conduits while laboring through their respective accounting scandals.A large part of how well the two government-sponsored enterprises will be able to duke it out with totally private entities remains to be seen, as lawmakers continue to argue whether the agencies need a new regulator and under what kind of rules they will have to operate. But whatever happens on Capitol Hill, Freddie Mac chairman Richard Syron told the Mortgage Bankers Association's annual convention in Chicago that his company is "determined to be as competitive as it can be." Mr. Syron said that for the last several years, both Fannie Mae and Freddie Mac have "been in the penalty box" and have been playing mostly defense. Private-label issuers now control an estimated 55%-60% of the mortgage-backed securities market. Fannie Mae chairman Daniel Mudd conceded that his company hasn't been innovative enough, especially while it has been dealing with its accounting irregularities. The company has also been too slow and bureaucratic, he said. But while Fannie has "been working to get our house in order," the company has also been "rethinking a lot of things, including how we do business," Mr. Mudd said. Both executives maintained that their respective companies were designed for the turbulent and changing market that lies ahead.

Experian Group Ltd., Costa Mesa, Calif., has brought its Hunter fraud detection product to the United States, the company announced at the Mortgage Bankers Association annual convention in Chicago.The product has been available in the United Kingdom for the past 10 years. It was originally developed to combat mortgage fraud, but has expanded to other credit applications as well, KC Akerman, senior product manager of Experian Fraud Solutions, told MortgageWire. It has not been introduced in the United States until now because Experian redesigned it from a client-based application, and it is now available as a hosted application. Its primary use is to catch application fraud in the prefunding stage by looking for red flags using a customized rules engine. It can use both shared and third-party data that the user has access to, Ms. Akerman said. In the U.K., she noted, users of Hunter share data findings with each other as part of their fraud prevention efforts.